Since the financial crisis of 2008 companies have been prompted to go “back to the basics" of good working capital management observes Ernst & Young partner Wayne Boulton, who conducts an annual survey comparing the working capital performance of the S&P/ASX 200 for Financial Review CFO.

When business is booming the discipline around working capital often falls by the wayside as more debt is taken on to fund growth. In 2011,
Asciano
’s total working capital as a percentage of sales remained pretty steady, even achieving a 0.9 per cent improvement while over the same period the company reported a 40.3 per cent growth in profitability.

That may sound like a small gain but only 50 of the ASX 200 managed any improvement to total working capital as a percentage of sales over the same period. “It doesn’t need any radical changes in the future, it’s just a matter of pushing up the curve" says
Asciano
chief financial officer
Angus McKay
.

Working capital is “an important focus within cash-flow management" says the CFO but “cash conversion is a fundamentally important metric".

Asciano
’s capital expenditure funding comes from both operating cash flow and the debt markets, so the CFO is “conscious of how ratings agencies, the banks, and ultimately shareholders will perceive the businesses cash flow and working capital management".

Looking ahead, McKay says “there is $700 to $900 million worth of capital expenditure that needs to be funded so it is important to prove the business can manage its cash flow – getting the cycle right is very important".

As a service provider operating rail and ports mostly utilised by the resources sector, Asciano has a very small inventory to manage so the two main levers the CFO has to maximise cash flow are payables and receivables.

McKay “simply doesn’t believe in debtor discounts" for early payment, instead he has taken steps to consolidated vendors and focused on “negotiating the right terms with fewer, larger players". For McKay, the right terms have included incentive schemes.

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He says other CFOs wary of broaching the subject of performance-based payments with suppliers should “be aware that it is almost a right to be able to do so".

“Raise it upfront, in the end it comes down to figuring out what works in both directions," says McKay.

“Negotiated properly, most suppliers normally want it too, it should be very fact based, so earlier payment never has to do with how long an invoice sits on someone’s desk," he says. McKay stresses it is also important to “make sure the procurement professionals in your organisation understand you want it and why".

In 2012, McKay plans to continue along the corporate consolidation path and will “try to renegotiate divisional contract into terms for the whole group" he says, as this will help achieve economies of scale and reduce administration. “So the renegotiations of contracts will be pushed one or two levels up."

This is consistent with a trend Boulton sees throughout the resources sector. “On the procurement front the big mining companies are getting smarter about leveraging their size," he says.

As with payables, on the receivables side “the vast majority of contracts have components with incentives around clearly defined performance milestones".

McKay says the terms should be clear about the cycle that needs to be delivered upon: “If we haven’t delivered on time we shouldn’t expect to get paid on time, but if we have delivered on time and payment is late there should be a penalty."

Asciano has also had success with finding ways to make the payment process easier. “Look for ways to get rid of administrative burden and encourage EFT," says McKay.

McKay makes it a priority to ensure the organisation understands the importance of cash flow. “The larger an organisation gets the harder it gets for people to understand it because culturally staff are more detached from the cash flow pressures on the business. If you are not measuring and talking about it constantly it will not be a priority for them," says the CFO.

“Cash flow is owned at a line manager level" and each manager has specific targets which are discussed at their “monthly ‘how did you go?’ dialogue" says McKay who explains it in simple terms of operating cashflow divided by EBITDA to see the inefficiency and then have a discussion about how to try and win some of that back. Cashflow is always linked to performance measures.

Boulton believes “most businesses need to revisit making working capital targets part of concrete performance-management measurements". It’s important to measure working capital on a monthly basis but Boulton also stresses it’s important to measure the right things. “The most common mistake is measuring too much," he says, “too many people get confused and don’t look at working capital or leave it till the end of the year or the last page of 30-page management report".

For more working capital secrets of the ASX 200’s top 10 working capital performers over the past year and to view the E&Y working capital research see the Financial Review CFO February 2012 cover story, Drilling for Cash.